Gold & Precious Metals

It’s a chart of gold fabrication demand — including jewelry, coin, dental, electronic and other industrial uses — that I made using data from Morgan Stanley.

In a moment, I’ll tell you why this is so important for you to know. But first, let me say that I’m not disputing its data or projection of gold fabrication demand. There’s something else to this chart. Take a look …

The red line is supply from gold mines, and the blue line is gold fabrication demand. Morgan Stanley’s numbers show that fabrication demand for gold is rising, and estimates indicate that it should soar in the years ahead. The company resolves this by saying that investment demand is going to go down. With all due respect to Morgan Stanley, I believe it has that part of the equation wrong, and the only way this demand squeeze will be resolved is through much, MUCH higher prices that force fabricators to look for substitutes.

After all, when the price of an investment — whether it’s gold or stocks or anything else — goes higher, do investors want less of it? Heck no! They usually want more — much more!And this is exactly what I think we’re going to see in gold — a rip-roaring rally that sends gold prices much, much higher.

I have more forces that I’ll be covering in my presentation in Orlando. But even now, there are other bullish factors falling into place for gold, like pieces to a gleaming metal puzzle. Let me tell you about three important developments that will drive gold prices higher, starting with the fact that……

China’s Gold Imports Are Soaring!

China’s gold imports from Hong Kong more than tripled in 2011 from the year before, hitting a record 428 metric tons.

China does not release official data on gold imports or demand. So the Hong Kong import numbers, published by the Hong Kong Census and Statistics Department, are considered to offer a partial view of overall demand.

According to sources quoted in the Financial Times, one trader at a Chinese bank said China’s total imports last year were at least 30% higher than the Hong Kong numbers. And for 2012, analysts believe China’s gold imports are going to continue to ramp up.

Bottom line: China is going to overtake India as the world’s largest gold consumer, probably sooner rather than later. And China’s hunger for the yellow metal is going to be a major force driving gold prices going forward.

And not only are prices going up, but so is the cost to produce it. Which begs the question …

Have We Hit Peak Gold?

Steve Letwin, the CEO of IAMGold, thinks so. In an interview with Mineweb, Mr. Letwin said: “I think you hit peak gold three or four years ago. You cannot find the large deposits anymore. Most of it (is) lower-grade and in more-remote locations, so it’s going to be difficult for anybody to produce gold at less than $1,200 per ounce in terms of new discoveries.”

Ore grades are falling — from around an average grade of 12 grams per ton in 1950 to about 3 grams per ton in the U.S., Canada and Australia. Miners are now going after ore they used to drive over to get to the big deposits.

They aren’t chasing low-grade ore because it’s fun. They’re going after low-grade ore because it’s all they can find. Now, there are mines going into production with less than a gram per ton of gold, and they’re quite profitable!

Sure, there probably are some high-grade deposits waiting to be discovered. But those higher-grade deposits will be smaller — that’s why they were overlooked the first time around.

People are Losing Faith in Fiat Currency

Fiat currency is paper money — in other words, it gets its value from government say-so. And with the government creating more and more money all the time — the Federal Reserve’s latest weekly money supply report from last Thursday shows that money supply has surged yet again, by more than 35% on an annualized basis — this shakes people’s faith in the value of paper money.

So more and more people are turning to REAL money — gold and silver.

That’s why U.S. Mint sales of American Eagle silver coins were the second highest EVER in January. Meanwhile, gold-coin sales totaled 127,000 ounces last month, the most since January 2011.

But I’m not just talking about individuals. Some state-level legislators are getting so worried about the U.S. dollar, they want out. Lawmakers from 13 states — including Minnesota, Tennessee, Iowa, South Carolina and Georgia — are seeking approval from their state governments to either issue their own alternative currency or explore it as an option. Just three years ago, only three states had similar proposals in place.

Of all the state proposals circulating right now, South Carolina, Georgia, Idaho and Indiana have the best chance of passing their proposed bills this year. If those bills become law, it could have a domino effect, cutting away one of the underpinnings of the U.S. dollar’s value.

And that would be just the latest problem for the U.S. dollar. The greenback has only held its value so well in the last year because the euro looks so bad that the dollar looks downright good in comparison.

When the rug finally gets pulled out from under the dollar’s wobbly feet, the fall could shake the world as we know it.

Bottom line: Gold is Ramping up for its Next Big Move

I could give you many more reasons why gold looks so good here. In fact, I’ll be giving a bunch of them in my presentation at the World Money Show in Orlando. But whether you see that presentation or not, know this — the fuse is lit on gold.

The forces of supply and demand are lighting the fuse on gold’s next big move. You’ll want to be onboard this metal rocket when it takes off.

Yours for trading profits,

Sean

P.S. Gold is going up, but not straight up. You’ve got to pick the right companies to invest in, AND grab them at the right time so you can get the biggest-possible return.

Frankly, that’s why I think the best investment you can make right now is to join my Red-Hot Global Resources service. We just got locked-and-loaded in three potentially rocket-fueled precious-metals trades. There’s still time to get in before these names blast off. Don’t miss out – join today and get access to these new trades!

Commodity price risk that is now to the upside and Barclays Capital analysts believe that 2012 is going to be a good one for producers of industrial metals and precious metals, Kevin Norrish, the bank’s managing director of commodities research told the Investing in African Mining Indaba here Monday.

The result will be gold trading above $2,000 an ounce, copper trading consistently above $9,000 a tonne by the second half of the year and platinum by the four quarter averaging somewhere around $1,800 an ounce, he said.

“The speed with which prices fell in the latter part of 2011 was very reminiscent of the speed at which prices were falling in 2008 and 2009,” he said. “So a lot of people say we’re coming into 2012 with the risks very clearly to the downside. I would disagree with that. Certainly our view is that 2012 is going to be a good year for commodities prices and it’s going to be a particularly good year for base and precious metals, In fact the risks are very much tilted to the upside.”

After prices fell 10 percent in December, many investors wondered if the bull market in gold was running out of steam. That was before Federal Reserve Chairman Ben Bernanke swooped in with a “red cape” and fired the bulls back up. Since the Fed reassured the world that interest rates will remain at “exceptionally low levels” for another two years, gold has jumped more than three percent.

A Wall Street pro named James Rickards recently released his first book,Currency Wars: The Making of the Next Global Crisis, and it’s creating a buzz. Euro Pacific Precious Metals’ CEO Peter Schiff often talks about competitive devaluation of currencies as the main driver behind our gold and silver investments. Recently, Peter sat down with James to get his perspective on what’s behind these currency wars, and find out what he recommends investors do to preserve their wealth through this tumultuous time.

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Peter Schiff: You portray recent monetary history as a series of currency wars – the first being 1921-1936, the second being 1967-1987, and the third going on right now. This seems accurate to me. In fact, my father got involved in economics because he saw the fallout of what you would call Currency War II, back in the ’60s. What differentiates each of these wars, and what is most significant about the current one?

James Rickards: Currency wars are characterized by successive competitive devaluations by major economies of their currencies against the currencies of their trading partners in an effort to steal growth from those trading partners.

While all currency wars have this much in common, they can occur in dissimilar economic climates and can take different paths. Currency War I (1921-1936) was dominated by a deflationary dynamic, while Currency War II (1967-1987) was dominated by inflation. Also, CWI ended in the disaster of World War II, while CWII was brought in for a soft landing, after a very bumpy ride, with the Plaza Accords of 1985 and the Louvre Accords of 1987.

What the first two currency wars had in common, apart from the devaluations, was the destruction of wealth resulting from an absence of price stability or an economic anchor.

Interestingly, Currency War III, which began in 2010, is really a tug-of-war between the natural deflation coming from the depression that began in 2007 and policy-induced inflation coming from Fed easing. The deflationary and inflationary vectors are fighting each other to a standstill for the time being, but the situation is highly unstable and will “tip” into one or the other sooner rather than later. Inflation bordering on hyperinflation seems like the more likely outcome at the moment because of the Fed’s attitude of “whatever it takes” in terms of money-printing; however, deflation cannot be ruled out if the Fed throws in the towel in the face of political opposition.

Peter: You and I agree that the dollar is on the road to ruin, and we both have made some drastic forecasts about what the government might do in the face of the dollar collapse. How might this scenario play out in your view?

James: The dollar is not necessarily on the road to ruin, but that outcome does seem highly likely at the moment. There is still time to pull back from the brink, but it requires a specific set of policies: breaking up big banks, banning derivatives, raising interest rates to make the US a magnet for capital, cutting government spending, eliminating capital gains and corporate income taxes, going to a personal flat tax, and reducing regulation on job-creating businesses. However, the likelihood of these policies being put in place seems remote – so the dollar collapse scenario must be considered.

Few Americans are aware of the International Economic Emergency Powers Act (IEEPA)… it gives any US president dictatorial powers to freeze accounts, seize assets, nationalize banks, and take other radical steps to fight economic collapse in the name of national security. Given these powers, one could see a set of actions including seizure of the 6,000 tons of foreign gold stored at the Federal Reserve Bank of New York which, when combined with Washington’s existing hoard of 8,000 tons, would leave the US as a gold superpower in a position to dictate the shape of the international monetary system going forward, as it did at Bretton Woods in 1944.

Peter: You write in your book that it’s possible that President Obama may call for a return to a pseudo-gold standard. That seems far-fetched to me. Why would a bunch of pro-inflation Keynesians in Washington voluntarily restrict their ability to print new money? Wouldn’t such a program require the government to default on its bonds?

James: My forecast does not pertain specifically to President Obama, but to any president faced with economic catastrophe. I agree that a typically Keynesian administration will not go to the gold standard easily or willingly. I only suggest that they may have no choice but to go to a gold standard in the face of a complete collapse of confidence in the dollar. It would be a gold standard of last resort, at a much higher price – perhaps $7,000 per ounce or higher.

This is similar to what President Roosevelt did in 1933 when he outlawed private gold ownership but then proceeded to increase the price 75% in the middle of the worst sustained period of deflation in U.S. history.

Peter: You also write that you were asked by the Department of Defense to teach them to attack other countries using monetary policy. Do you believe there has a been an deliberate attempt to rack up as much public debt as possible – from the Chinese, in particular – and then strategically default through inflation?

James: I do not believe there has been a deliberate plot to rack up debt for the strategic purpose of default; however, something like that has resulted anyway.

Conventional wisdom is that China has the US over a barrel because it holds more than $2 trillion of US dollar-denominated debt, which it could dump at any time. In fact, the US has China over a barrel because it can freeze Chinese accounts in the face of any attempted dumping and substantially devalue the worth of the money we owe the Chinese. The Chinese themselves have been slow to realize this. In hindsight, their greatest blunder will turn out to be trusting the US to maintain the value of its currency.

Peter: In your book, you lay out four possible results from the present currency war. Please briefly describe these and which one do you feel is most likely and why.

James: Yes, I lay out four scenarios, which I call “The Four Horsemen of the Dollar Apocalypse.”

The first case is a world of multiple reserve currencies with the dollar being just one among several. This is the preferred solution of academics. I call it the “Kumbaya Solution” because it assumes all of the currencies will get along fine with each other. In fact, however, instead of one central bank behaving badly, we will have many.

The second case is world money in the form of Special Drawing Rights (SDRs). This is the preferred solution of global elites. The foundation for this has already been laid and the plumbing is already in place. The International Monetary Fund (IMF) would have its own printing press under the unaccountable control of the G20. This would reduce the dollar to the role of a local currency, as all important international transfers would be denominated in SDRs.

The third case is a return to the gold standard. This would have to be done at a much higher price to avoid the deflationary blunder of the 1920s, when nations returned to gold at an old parity that could not be sustained without massive deflation due to all of the money-printing in the meantime. I suggest a price of $7,000 per ounce for the new parity.

My final case is chaos and a resort to emergency economic powers. I consider this the most likely because of a combination of denial, delay, and wishful thinking on the part of the monetary elites.

Peter: What do you see as Washington’s end-game for the present currency war? What is their best-case scenario?

James: Washington’s best-case scenario is that banks gradually heal by making leveraged profits on the spreads between low-cost deposits and safe government bonds. These profits are then a cushion to absorb losses on bad assets and, eventually, the system becomes healthy again and can start the lending-and-spending game over again.

I view this as unlikely because the debts are so great, the time needed so long, and the deflationary forces so strong that the banks will not recover before the needed money-printing drives the system over a cliff – through a loss of confidence in the dollar and other paper currencies.

Peter: I don’t think this scenario is likely either, but say it were… would it be healthy for the American economy to have to carry all these zombie banks that depend on subsidies for survival? Wouldn’t it be better to just let the toxic assets and toxic banks flush out of the system?

James: I agree completely. There’s a model for this in the 1919-1920 depression, when the US government actually ran a balanced budget and the private sector was left to clean up the mess. The depression was over in 18 months and the US then set out on one of its strongest decades of growth ever. Today, in contrast, we have the government intervening everywhere, with the result that we should expect the current depression to last for years – possibly a decade.

Peter: How long do you think Currency War III will last?

James: History shows that Currency War I lasted 15 years and Currency War II lasted 20 years. There is no reason to believe that Currency War III will be brief. It’s difficult to say, but it should last 5 years at least, possibly much longer.

Peter: From my perspective, what is unique about a currency war is that the object is to inflict damage on yourself, and the country often described as the winner is actually the biggest loser, because they’ve devalued their currency the most. Which currency do you think will come out of this war the strongest?

James: I expect Europe and the euro will emerge the strongest after this currency war by doing the most to maintain the value of its currency while focusing on economic fundamentals, rather than quick fixes through devaluation. This is because the US and China are both currency manipulators out to reduce the value of their currencies. In the zero-sum world of currency wars, if the dollar and yuan are both down or flat, the euro must be going up. This is why the euro has not acted in accord with market expectations of its collapse.

The other reason the euro is strong and getting stronger is because it is backed by 10,000 tons of gold – even more than the US This is a source of strength for the euro.

Peter: You and I both connect the Fed’s dollar-printing with the recent revolutions in the Middle East. This is because our inflation is being exported overseas and driving up prices for food and fuel in third-world countries. What do you think will happen domestically when all this inflation comes home to roost?

James: The Fed will allow the inflation to grow in the US because it is the only way out of the non-payable debt.

Initially, American investors will be happy because the inflation will be accompanied by rising stock prices. However, over time, the capital-destroying nature of inflation will become apparent – and markets will collapse. This will look like a replay of the 1970s.

Peter: How long do you think China’s elites will put up with the Fed’s inflationary agenda before they start dumping their US dollar assets?

James: The Chinese will never “dump” assets because this could cause the US to freeze their accounts. However, the Chinese will shorten the maturity structure of those assets to reduce volatility, diversify assets by reallocating new reserves towards euro and yen, increase their gold holdings, and engage in direct investment in hard assets such as mines, farmland, railroads, etc. All of these developments are happening now and the tempo will increase in future.

Peter: In your view, what is the best way for investors to protect themselves from this crisis?

James: My recommended portfolio is 20% gold, 5% silver, 20% undeveloped land in prime locations with development potential, 15% fine art, and 40% cash. The cash is not a long-term position but does give an investor short-term wealth preservation and optionality to pivot into other asset classes when there is greater visibility.

[Editor’s note: Opinions expressed are the interviewee’s own and do not represent investment advice from Peter Schiff or Euro Pacific Precious Metals.]

Peter: What, if any, silver lining do you see for us in the future?

James: I continue to have faith in the democratic process and the wisdom of the American people. Through elections, we might be able to change leadership and implement new policies before it’s too late.

Failing that, the worst outcomes are all but unavoidable.

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We would like to thank James for speaking to us about this topic and educating the public about the dangers of currency wars. We at Euro Pacific Precious Metals believe they represent the greatest threat to investors’ financial wellbeing today.

While James and Peter may disagree on some key points, we think he has accurately diagnosed the mentality that may drive the US to a dollar collapse. Unless the US decides to quit the currency wars, investors will continue to be pushed into precious metals and other hard assets. And, as James illustrates, declaring a truce is easier said than done.

James G. Rickards is Senior Managing Director at Tangent Capital Partners LLC, a merchant bank based in New York City, and is Senior Managing Director for Market Intelligence at Omnis, Inc., a technical, professional and scientific consulting firm located in McLean, VA.

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Let me say — in no uncertain terms — that if you think all these markets that are rallying are about to shoot to the moon, I think you need to stand back and be very, very careful.

Yes, everything from gold to silver to stocks are rallying — but that does not mean the rallies are the real McCoy — and that they are going to continue to rally. Indeed, ALL of my indicators continue to suggest that big traps are being set, and the next big moves will not be UP, but instead, will be DOWN.

Let’s go right to the charts. Here’s my latest gold chart.

As you can see, gold is now pressing up against the top of a major cyclical trend channel, and it’s going to have a hard time getting through that resistance level.

In addition, I’m seeing signs that gold is overbought … and that demand in Asia, outside of China, is starting to slump. So I am still looking for another move down in gold. Long-term investors should hold their long-term gold positions. Speculators should continue to play the short side.

Now, my latest chart of silver.

Silver has come a lot further than I expected, no doubt about it. But here too silver is coming very close to a confluence of resistance levels on the chart, and it too is showing signs of being overbought.

Plus, it has not hit any major buy signals on my systems. I still expect a major move down in silver, and it will likely come without much notice, so please be very careful in silver.

Meanwhile, the dollar’s recent decline is beginning to stabilize. There’s mid-channel support around the 78.50 level on the Dollar Index, and I expect it to hold and give way to another rally in the dollar.

This is even more likely given the position of the euro, which has already staged a bounce that is near completion. So as the euro likely turns backs down, we will see another leg higher in the dollar.

Now to the Dow Industrials. The Dow is up against a triple-top now, and it would simply be foolish to be buying here. We may see the Dow poke a bit higher, but in my experience with triple-tops, any move up from here is likely to be a trap. Interestingly, the Dow is showing signs of what I’ve been warning all along — that it will eventually become a major new bull market. But that time has not yet arrived. We are far more likely to see a hard decline first, then a fourth attempt back to the horizontal resistance line you see on this chart. The fourth time though will be the charm, indicating a new bull market has arrived in the Dow. But I repeat, we are not there yet and a sharp, surprising sell off in the stock markets could come at any moment.